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Are We Headed for a Market Correction?


Are we headed for a market correction?

It’s possible.

In fact, you could argue that a correction has been underway for several months now.

Take a look at the chart below…

It shows the percentage of Nasdaq stocks that are trading above their 200-day moving averages (MAs).

Percentage of Nasdaq Stocks Above 200-Day Moving Average — Source: StockCharts.com

As regular readers know, the 200-day MA is one of my favorite long-term trend indicators.

If a stock is trading below its 200-day MA, it tells me that the stock’s trend is bearish, and I will not buy it under any circumstance.

If the market was still in an uptrend, most stocks would be above their 200-day MAs, and the chart would be at the 50% level or higher.

But as you can see, only 35% of Nasdaq stocks are trading above their 200-day MAs. On the other hand, 65% of Nasdaq stocks are trading below.

This might surprise you. After all, the indexes have been grinding higher for several months.

Daily Chart of Nasdaq Composite Index — Source: StockCharts.com

This is exactly why I don’t use the indexes to tell me when to buy and sell.

They are market-cap-weighted, which means that the larger a stock’s market capitalization, the greater impact it has on the pricing of the index.

For example, just 10 stocks make up more than 50% of the weighting in the Nasdaq index.

But this small handful of names, which includes Apple Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com, Inc. (AMZN), Tesla, Inc. (TSLA), etc., are not indicative of how the 3,000 other stocks in the index are trading.

I’ve been talking about this divergence between the index and stock participation for several months.

So, it shouldn’t be a surprise that stocks have come under pressure lately.

This mini correction has been going on since February. Participation has fallen from 87% of stocks to 35% while the index has moved higher.

This trend is unsustainable. And the market is beginning to show weakness in the bigger names.

Performance Chart of Amazon.com, Inc. (AMZN), NVIDIA Corp. (NVDA), PayPal Holdings, Inc. (PYPL) & Facebook, Inc. (FB) — Source: TradingView

I’ve reduced my exposure substantially over the last two weeks. I’m still trading but at about 25% my normal size.

My plan is to keep my trading light until things firm up and start getting better follow-through in individual trades.

And as I mentioned last week, don’t hesitate to take some profits and lock in a gain if you have one when markets are shaky.

Embrace the Surge,

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